Metalgesselschaft, a leading German metal processor, has scheduled a supply of 20,000 metric tons of copper for August 10, 1995. On May 10, 1995, copper is quoted at 1,725 pounds sterling (£) per metric ton for immediate delivery and at £1,722 per metric ton for delivery on August 10, 1995, on the London Metals Exchange. Monthly storage cost will run at £10 for a metric ton in London and 30 Deutsche mark (DM) in Hamburg, payable on the first day of storage.

Exchange rate quotations are as follows: the pound sterling is worth 2.18 Deutsche marks on May 10 and is selling at a 2.8% annual discount. The opportunity cost of capital for Metalgesselschaft is estimated at 6% annually, and the pound sterling is expected to depreciate at a yearly rate of 2.8% throughout the next 12 months.

Compute the Deutsche mark cost on May 10, 1995, for Metalgesselschaft of the following options:

(a) Buy 20,000 metric tons of copper on May 10 and store it in London until August 10.

(b) Buy a future contract of 20,000 metric tons on May 10, 1995, for delivery in three months. Cover sterling debt by purchasing forward pounds sterling on May 10, 1995.

(c) Buy 20,000 metric tons on August 10, 1995.

Can you identify other options available to Metalgesselschaft? Which one would you recommend?